As an investor, you know it’s important to have a portion of your holdings in savings. Opinions differ, but most financial professionals agree that adequate savings should form the basis of any sound investment strategy. There are a number of savings alternatives that could help you accumulate adequate savings and earn a reasonable rate of return.
Certificates of deposit are really just short-term loans to a bank, credit union, or savings and loan. They offer a moderate rate of return and relative safety because they are insured by the FDIC for up to $250,000 per depositor, per federally insured institution, in interest and principal.
These accounts are much like checking accounts, except that they may be held by a brokerage instead of a bank. You can use your money to trade stocks and bonds and buy money market funds. Many brokerages will automatically sweep your earnings into a money market account.
For many years, when bonds were mentioned, people thought of U.S. savings bonds. Series EE savings bonds are only available electronically in denominations from $50 to $5,000. Tax on the interest is deferred until maturity and may be eliminated if the proceeds are used to pay for a college education.
These bonds are designed to offer protection from inflation. By linking the return of the bonds to an inflation index, the bonds are always guaranteed to earn a fixed rate above the inflation rate. They are a sort of hybrid between Treasury Inflation-Protected Securities (TIPS), which are issued as marketable securities, and EE bonds. Paper I bonds are available in $50, $100, $200, $500, and $1,000 denominations. Paper I bonds are only available using your tax refund. Electronic I bonds can be purchased with a $25 minimum or any amount above that to the penny up to the maximum allowed per year. You can purchase up to $10,000 in electronic I bonds or $5,000 in paper I bonds per Social Security number per year. You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest.
In a money market fund, your investment is pooled with that of other investors. The resulting fund is invested in a diverse portfolio of short-term debt securities. Money market funds offer a high level of safety and moderate income.
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market funds.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
These accounts combine the interest-earning capability of a savings account with the check-writing convenience of a checking account. They are offered through many banks, savings and loans, and credit unions. Some charge a fee if you fail to maintain a minimum balance.
Treasury bills are literally short-term loans to the federal government. They are sold at a discount from their face value in maturities of three months, six months, and one year. The interest on Treasury bills is exempt from state and local income taxes. Treasury bills are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The principal value will fluctuate with changes in market conditions; if not held to maturity, T-bills may be worth more or less than their original cost.
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